Executive finance and strategy

Order of the chapters Terminology used in this book Structure of the chapters How you might use this book What is strategy? What does financial strategy mean?Content, order and logic of this chapter Order and logic Definitions of 'financial', 'strategy' and 'strategic'Financial Strategy Strategic Further strategy-related definitions Align Goal Objective(s)Mission Mission statements Motive Tactic Target Values Vision What is business strategy?What is the objective of financial strategy?Why be in business?Conclusion Financial strategy. Why be in business?Content, order and logic of this chapter Order and logic What do successful companies say?How does making a return on investment link with strategy?What successful companies say Making a good return is the objective, but what exactly is ROI?The base model An arithmetical proof of a high-return strategy Strategic drivers of ROI A higher margin (selling price)/lower operating cost strategy Higher sales/volume strategy Lower margin/higher sales volume strategy Lower capital employed strategy - 'cheap is good!'Life-cycle costing/whole-life costing strategy High gearing strategy Conclusion Revision and learning pointers Basic financial reports and concepts Links between financial statements and strategy Content, order and logic of this chapter Order and logic The importance of cash records and reports Cash flow reports - illustration Cash flow forecasts Bedrock concepts Going concern - a fundamental concept, also termed an underlying assumption Accruals or matching concept Income statement - the P&L account Income statements - P&L accounts Cost of sales Gross profit Review question - interpreting P&L account profiles Statement of financial position -the balance sheet Financial position - the balance sheet A simple balance sheet and a layout used for management purposes 'Reading' the balance sheet What do balance sheets reveal about a business?More practice Alternative balance sheet layouts Conclusion Revision and learning pointers What underpins financial statements?Links with strategy Content, order and logic of this chapter Logic and order Company law and directors' responsibilities UK company law requirements Company law requirements re storage and access to records Other UK company law that has a bearing on financial strategies Further Companies Act 2006 sections of which executives should be aware Summary of legal requirements regarding the strategic report (covered in detail in Chapter 6)Record keeping/bookkeeping Why have accounting records? Why bother with bookkeeping?Assets Liabilities Income/sales/revenue Expenses/costs/purchases/overheads Their place in financial statements The academic 'accounting framework' definitions Bookkeeping examples There is no such thing as 'just a figure'Internal controls - accounting systems and procedures - prevention of error and fraud Accounting systems Internal controls Other reasons for internal control External and internal audit - prevention of error and fraud Audit function External audit Summary Directors' responsibilities statements Internal audit function Corporate governance Corporate governance covers much more than ethics Conclusion Revision and learning pointers Accounting 'rules'. How accounting theory and rules affect the strategic numbers Content, order and logic of this chapter Order and logic Background to accounting standards Why the emphasis on 'useful in making economic decisions'?Enhancing qualitative characteristics Understandability (this word does not pass spell checkers!) and the existence of accounting phenomena The probability of future economic benefit The objective or purpose of financial statements What do GAAP, FASB, IASB and IFRS mean?Financial position - the balance sheet Assets Liabilities Equity Recognition and measurement Recognition of assets Recognition of liabilities Recognition of income Recognition of expenses Measurement of the elements of financial statements Principal accounting concepts -going concern and accruals Going concern - a fundamental concept, also termed an underlying assumption Accruals concept - a fundamental concept Materiality How might materiality impinge on strategy?Substance over form Prudence Prudence and strategies Completeness Comparability How the concepts impact on the figures (and restrain some behaviour)So how does all of this affect financial strategy?Creative accounting/aggressive accounting You cannot do what you like GAAP, which may cause issues with strategies Revenue Leases Conclusion Revision and learning pointers Published or statutory accounts Links between published financial statements and financial strategy Content, order and logic of this chapter Order and logic What extant accounting standards require Purpose of financial statements Income statements and other comprehensive income Examples of published income statements Balance sheets - statements of financial position BT plc Group balance sheet Notes to financial statements UK full financial statements Developments in financial reporting The strategic report Long-term views are encouraged Future developments Conclusion Revision and learning pointers Interpreting financial statements Interpreting financial statements Links between interpretation and financial strategy Content, order and logic of this chapter Order and logic Techniques for interpreting financial statements Comparisons with past or budgeted performance or position Ratios - presenting one figure relative to another Materiality and relative amounts Considering relationships - analytical review Comparisons with external benchmarks Charts and graphs Further considerations Exception reporting Random events Automating the interpretation - intelligent interpretation Ratio analysis A food producer and an engineering company The pyramid of ratios More detailed analysis is required Working capital ratios Current ratio Liquidity ratio/quick ratio/acid test ratio Gearing or leverage ratios Analytical review Uses of analytical reviews External ratios Share values Earnings per share (EPS)Dividends per share (DPS)Dividend cover Earnings yield and dividend yield Price to earnings ratio (P/E ratio)Market to book ratio EBITDA Why we have to disclose ratios Conclusion Revision and learning pointers Cash: the vital element Links between cash and financial strategy Content, order and logic of this chapter Order and logic Where cash appears in financial statements Cash flows for trading - working capital Worked example Insolvency - going concern - overtrading Insolvency Going concern Overtrading Capital cash flows Statement of cash flows The structure of a statement of cash flow Published statements of cash flow IAS 7 Statement of cash flows The statement of cash flows - the three views of business cash Operating activities Investing activities Financing activities Examples of company cash flows and how they relate to strategies Commentary What does the BT pic cash flow statement tell us?Cash-flow-focused strategies The mundane money-making strategy -cash generation for ever The capital investment strategy - invest for a longer-term return The acquisition strategy - investing cash, or better still little or no cash but rather issuing shares, to acquire businesses which may be a bargain or which you can turn around Acquisition 'run-out' strategy Trading strategy - acquire and dispose of companies The extractive strategy Invest and sell on a promise strategy - beauty is in the eye of the beholder (or the deceived or delusional!)Conclusion Revision and learning pointers Management accounting. Internal reports and business models How does management accounting support strategy?Links between management accounting and financial strategy Content, order and logic of this chapter Logic and order The wide scope of management accounting Cautionary words on modelling Modelling operational structure, particularly costs Modelling the future Budget models Cash flow models Management reports - to assist with understanding strategy and its delivery Why have detailed internal management reports?Why does the management report exist?Appropriate design of reports is important A checklist to assist with making clear, actionable reports Future reporting Sales and costing definitions and models Common types of models Costing models - definitions Costing models - costing for planning Costing models - costing to calculate full costs Reporting overheads - overhead analysis KPIs, dashboards and detailed analysis Analytics - can there be too much analysis?Conclusion Revision and learning pointers Budgeting Content, order and logic of this chapter Order and logic What does budgeting mean?Forecasting methods The difference between 'forecast' and 'budget'How you might forecast Methods of forecasting (a) Incremental budgeting (b) Researching (c) Extrapolation methods (d) Leading indicators (e) Modelling (f) Guaranteeing the figures Why budget?Where do budget objectives come from?Budget stages How to budget Methods of budgeting An incremental approach Zero-based budgeting Weaknesses of traditional budgeting and how ZBB differs Problems in implementing a ZBB system Finally, does ZBB work?Budget reports Budget culture The ideas, customs, and social behaviour of a particular people or society The attitudes and behaviour characteristic of a particular social group Example A - XYZ pic Example B Example C Conclusion Revision and learning pointers Investment appraisal. Investment strategy Links between investment and financial strategy Content, order and logic of this chapter Order and logic The need for investment appraisal Arithmetic of appraisal - discounting cash flows Time value of money Compounding and discounting Time base The simple truths from the tables The time value of money and required rates What is meant by 'rate'?What (discount) rate should be used?Cash flow models Common errors in appraisal cash flow Depreciation costs are included Interest and loan repayment are included Sunk costs Common appraisal measures Non-discounted methods - accounting rate of return, ROCE or ROI Non-discounted methods - payback Net present value (NPV) or present worth Internal rate of return (IRR) or DCF yield NPV or IRR - which should be used?Risk identification and management Need for a defined model Sensitivity analysis The need for the most likely case No need for provisions or contingencies 'One at a time' approach Linked parameters How much analysis should be carried out?What is meant by 'sensitive' - what levels of sensitivity can be tolerated?The need for a consistent and robust process Project appraisal - an integrated approach The many uses of appraisal models Lease versus buy In favour of purchasing In favour of leasing Valuing properties Conclusion Revision and learning pointers Structural or pure financial strategies Content, order and logic of this chapter Order and logic Basic definitions Equity Sources of funds Cost of capital Gearing or leverage and the 'magic' of gearing What is the 'magic' of gearing?Leasing and off-balance sheet finance Substance over form Lessee accounting - basic approach Initial measurement The dual approach Leases where the lessee consumes or uses up part of the underlying asset (Type A leases)Leases where the lessee pays for the use of the underlying asset (Type B leases)Sale and leaseback Asset light Asset stripping Group structures Assessing control - investor assessment Criteria Determining control Special purpose vehicles or entities -off-balance sheet activities IFRS 12 Disclosure of Interests in Other Entities Objective of the standard Interests in subsidiaries Interests in joint arrangements and associates Interests in unconsolidated structured entities Foreign currency issues Hedging strategies Conclusion Revision and learning pointers What are your company objectives - where do you fit in?Long term (and sustainable)Short or medium term Short term Strategies both financial and physical to support objectives Links between the book's chapters and strategies Are your strategies co-coordinated and aligned?Aphorisms GLOSSARY